Is “Fraud Tourism” The Next Big Thing? How U.S. Government Money Ends Up Abroad

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How much of the Paycheck Protection Program (“PPP”) will end up in the hands of bad actors? With several hundreds of billions of dollars in the PPP bucket, fraud, misuse, and misdirection of funds is already being identified by federal investigators.

The CARES Act, which sought to provide economic assistance during the global health pandemic, is exalted as an essential federal initiative. One of the most visible pieces of that Act is the PPP, which seeks to provide immediate financial assistance in the form of SBA-guaranteed loans to small and medium-sized businesses impacted by the economic uncertainties of the novel coronavirus. An important yet severe consequence is the rise of fraud in connection with an applicant’s PPP loan application and misuse of PPP loan proceeds.

Such situations are not hard to conceive and are hardly innovative. Every federal government program that disburses a large amount of money in a short period of time is accompanied by the potential for fraud. In March, the DOJ alleged charges of PPP loan fraud against Mr. William Sadleir, a Hollywood producer. Mr. Sadleir certified in his application that the PPP funds would be used for payroll expenses for his three companies. Instead, he immediately transferred over half the funds to his personal bank account to pay off personal expenses such as credit card debt and a car loan, among other personal expenses. Other individuals have been accused of obtaining loans for companies that did not exist, had gone out of business, or which those individuals did not own.

These examples beg the question of the frequency of these occurrences. Further, would matters change if the PPP funds are fraudulently transferred overseas to foreign bank accounts? This article discusses the less-addressed challenges for law enforcement agencies with respect to PPP funds that are fraudulently obtained and subsequently transferred overseas. And it is not just PPP money at issue – any government program is subject to fraud and must address the problem of fraudulent proceeds that have been sent to a foreign company.

The Fraudulent Transfer of Funds Abroad

Often, both individuals and companies will use overseas bank accounts to fraudulently hide assets from the U.S. government in an effort to avoid U.S. taxation or conceal some other fraudulent scheme. Several overseas jurisdictions provide financial secrecy and safe havens that attract fraudsters into taking such action.

Fraudulently transferring federal funds to foreign jurisdictions is common in tax fraud, various types of healthcare crimes such as Medicare fraud and SEC scams such as Ponzi schemes. PPP loan funds are no different. Obtaining a PPP loan through false pretenses and material misrepresentations and then transferring those assets abroad is a crime and violates many federal statutes such as wire fraud, bank fraud, money laundering, and conspiracy, as some examples.

Implications of Transferring PPP Funds to Foreign Jurisdictions

The FBI released a statement before the Senate Judiciary Committee on June 9, 2020, in which it acknowledged the prevalence of COVID-19-related stimulus, healthcare, and government fraud schemes such as fraudulently applying for PPP loans or "targeting PPP funds once they have been disbursed."

The FBI recounted multiple scenarios of cyber-related COVID-19 frauds such as a fraudster who used an email address virtually identical to that of a CEO who was approved for a PPP loan in order to convince the financial institution facilitating the loan to transfer the funds to a new account, and individuals falsely claiming to be brokers and receiving the wired transferred funds before shipping the products. By the time any suspicious activity became apparent, "much of the funds had been transferred outside the reach of U.S. law enforcement and were unrecoverable."

This is a significant problem for U.S law enforcement. International law and the local nature of foreign banking laws and foreign evidence gathering techniques are likely novel topics for U.S. law enforcement. Principles such as sovereignty and comity obstruct U.S. jurisdiction and the ability of U.S. prosecutors to accumulate evidence pertaining to the crime. In most situations, not even the commission of a crime bestows U.S. jurisdiction. Therefore, the chances of recovering the PPP loan proceeds abroad looks bleak.

Refinitiv—which provides financial market data news—notes that cross-border theft represents a significant financial crime risk perpetrated by individuals seeking to exploit weaknesses in the PPP loan process. Such theft is also committed by foreign-based criminals.

The process is similar to U.S. persons applying for a PPP loan. Under this scenario, foreign-based criminals fraudulently submit PPP loan applications to the SBA and financial lending institutions. These foreign criminals generally pose as genuine U.S. business owners after illicitly obtaining personally identifying information (“PII”) and stealing the identities of U.S. business owners. While the financial lending institutions are permitted to rely on the certifications made in the PPP loan application, they are also required to make a good faith review that the information therein is valid.

However, spotting a fake application can be complex, especially when the financial lending institutions maintain poor anti-laundering standards to detect and prevent fraud. Once the foreign-based criminals receive the PPP loan proceeds, they quickly transfer the funds overseas. This gives law enforcement agencies a double whammy in investigating PPP loan fraud: not only are the perpetrators based in a foreign jurisdiction but the fruits of their fraudulent activities—the stolen PPP loan proceeds—have also been transferred abroad.

"With the limited federal and bank oversight of PPP loan applications, the risk of foreign entities fraudulently obtaining funds under the program is fairly high. Once a bank issues a loan to a foreign entity and that entity transfers the funds overseas, the likelihood of those funds being recovered drops significantly," - Dr. Nick Oberheiden of Oberheiden P.C.

Similarly, in recent years many Medicare fraud cases have involved foreign actors and foreign bank accounts. For example, overseas call centers may be used to call senior citizens and offer them free medical supplies or equipment. Once the foreign actors have the person’s Medicare information, they sell it to unscrupulous doctors who write a prescription for the supplies and send the bill to Medicare. Meanwhile, the portion of the funds that was paid as a kickback to the overseas company is quickly moved through shell companies to a bank account that may be beyond the government’s reach.

Conclusion

Despite the seeming benefits of the Paycheck Protection Program for businesses, the potential for fraud in connection with PPP loan payments is becoming a grave concern for law enforcement agencies. Instances of PPP loan application fraud and misuse of loan proceeds are on a steady rise and demonstrate that there is more than one weakness in the program.

In addition to the possibility that individuals may fraudulently obtain a PPP loan and then transfer the funds to their personal accounts for prohibited purposes, there is also the less-addressed situation of individuals transferring their PPP loan proceeds overseas. In fact, this problem has been present for years in similar fraud schemes involving different federal programs, including Medicare.

While the transfer to foreign bank accounts represents an attractive option due to foreign secrecy policies, detecting the resulting fraud will continue to be a challenge for U.S. law enforcement agencies due to the difficulty in recovering the funds and increase in foreign-based criminals exploiting the PPP loan process. More PPP fraud and concealment are expected.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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